Memeorandum

November 22, 2002

Krugman Identifies The Problem

Krugman Identifies The Problem

Prof. Krugman identifies the problem with income inequality and income mobility in America today. It is not, as you might have thought, that it is difficult for poor people to move up into the middle class. No, the problem is that it is too difficult for the middle class to enter the ranks of the super-rich, and too unlikely that the super-rich will fall back to earth.

I can only infer that a Princeton Professor with an economics specialty living in a suburb near Wall Street observes too many people who are less-educated, but much better paid. I expect he would be happier being a professor at Dartmouth. Perhaps Brown.

Well, enough of worrying about Paul's well-being. Let's have at "The Sons Also Rise", a cute but deplorably sexist title - how about "The Golden Apples of the Son">?

America, we all know, is the land of opportunity. Your success in life depends on your ability and drive, not on who your father was.

Well, we believe that in America a person can succeed with ability and drive, regardless of who one's father is. I don't think that, even in our American dreams, we have argued that having a successful father is not an advantage.

Just ask the Bush brothers. Talk to Elizabeth Cheney, who holds a specially created State Department job, or her husband, chief counsel of the Office of Management and Budget. Interview Eugene Scalia, the top lawyer at the Labor Department, and Janet Rehnquist, inspector general at the Department of Health and Human Services. And don't forget to check in with William Kristol, editor of The Weekly Standard, and the conservative commentator John Podhoretz.

Now, the obvious objective of this introduction is to bait a distraction for his critics, who will stop right here and mention many, many Democrats who have inherited their claim to fame. Rather than spend time walking down that road, I will mention Al Gore, Nancy Pelosi, and Harold Ford Jr., then press on.

It has always been good to have a rich or powerful father. Last week my Princeton colleague Alan Krueger wrote a column for The Times surveying statistical studies that debunk the mythology of American social mobility. "If the United States stands out in comparison with other countries," he wrote, "it is in having a more static distribution of income across generations with fewer opportunities for advancement."

Ahh, the Alan Krueger piece. This was noted approvingly by Prof. DeLong, and crows picked at it quite vigorously in the lengthy comments. Folks aware of my secret identity might find me there, in fact.

So, beyond simply passing dollars to their descendants, what did Prof. Krueger say about the heritability of wealth:

Why is there such a strong connection between parents' socioeconomic status and their children's? A large part of the answer involves intergenerational transmission of cognitive ability and educational level.

But these factors can "explain at most three-fifths of the intergenerational transmission of economic status," Samuel Bowles and Herbert Gintis of the University of Massachusetts wrote in the latest issue of The Journal of Economic Perspectives. They suggest that the intergenerational transmission of race, geographical location, height, beauty, health status and personality also plays a significant role.

Unsurprising. Educated people encourage their kids to get educated. Smart people have smart kids. Healthy people have healthy kids.

And how does Krueger, cited approvingly by Krugman, compare income mobility in America with that in the rest of the world?

Perhaps the only legitimate use of the intergenerational correlation in income is to characterize economic mobility. The data challenge the notion that the United States is an exceptionally mobile society. If the United States stands out in comparison with other countries, it is in having a more static distribution of income across generations with fewer opportunities for advancement.

Anders Björklund of Stockholm University and Markus Jäntti of the University of Tampere in Finland, for example, find more economic mobility in Sweden than in the United States. Only South Africa and Britain have as little mobility across generations as the United States.

Well, he says "for instance", so perhaps he has some other studies in mind. But this seems to be the study Krueger cited:

[LATE NOTE: "perhaps" and "seems to be" were meant to hold open the possibility that Prof. Krueger had some other paper in mind. Check the UPDATES for what is almost surely the correct paper.]

Abstract

This paper compares income inequality and income mobility in the Scandinavian countries and the United States during 1980-90. The results suggest that inequality is greater in the United States than in the Scandinavian countries and that this inequality ranking of countries remains unchanged when the accounting period of income is extended from one to eleven years. The pattern of mobility turns out to be remarkably similar, in the sense that the proportionate reduction in inequality from extending the accounting period of income is much the same. But we do find evidence of greater dispersion of first differences of relative earnings and income in the United States. Relative income changes are associated with changes in labor market and marital status in all four countries, but the magnitude of such changes are largest in the United States.

JEL Key Words: D31 Personal Income and Wealth Distribution

OK, bit of confusion. This site also has this paper and links to others. Info on South Africa and Britain are presumably coming from elsewhere, but I can't find it.

The key points made in challenging this paper:

1. The study looked at income mobility across quintiles. Suppose, hypothetically, that two countries have a median income of $25,000. Country A has much less income inequality, so that it's lowest quintile has a cutoff of $23,000, and its highest quintile a cut-off of $27,000. Country B has a low quintile of $10,000, and a high quintile of $50,000.

Suppose someone in Country B improves their income from $11,000 to $49,000. Success!? Well, they have only moved from the second quintile to the fourth. Loser! Their counterpart in Sweden, sorry, Country A, improves their income from $22,500 to $27,500. The Swedish dream! This stalwart has vaulted from the lowest quintile to the top of the (low) mountain!

2. The data was only from the 1980's, not a bad time for the US or Sweden. It also is a bit of a one way comparison - Sweden is relatively small, prosperous, and homogenous, and with a low level of immigration. Here is another paper from the same site titled "Wealth Dynamics in the 1980’s and 1990’s: Sweden and the U.S."

Abstract: Given differences in public saving programs between Sweden and the United States, an examination of household private wealth accumulation in these two countries can be enlightening. In this paper we examine wealth inequality and mobility in Sweden and the United States over the past decade. We show that wealth inequality has been significantly greater in the U.S. than in Sweden and, while remaining relatively constant since the mid-1980’s in Sweden, has increased in the United States. In addition to less inequality and a higher median wealth, we also show that wealth quintile mobility in the 1990’s has been 25.7% higher in Sweden, as measured by Shorrocks’ index. Noting the role of various demographic components in shaping the patterns of wealth mobility as well as the importance of the initial wealth distribution, we utilize a matching algorithm that controls for these differences. Matching on the initial wealth distribution alone accounts for most of the mobility difference between the two countries and yields a Shorrocks’ index in the U.S. 11.1% less than that in Sweden. Adjusting for the large degree of imputation in the Swedish data, the U.S. index is only 3.4% to 6.1% less than that of Sweden. Along with exploring the role of racial composition differences, we conclude tha demographic variation between Sweden and the U.S. play very little role in explaining wealth mobility beyond that explained by the initial wealth distribution. Despite the higher quintile mobility in Sweden, dollar mobility is still high in the United States.

Emphasis added. Now, I just have to excerpt this next bit, partly to make a point, and partly because it is perhaps the most amusing spin I have seen, at least today.

For 1994 to 1999, Table 4 shows that 58 percent or almost three-fifths of U.S. families in the lowest quintile in 1994 were still in the lowest quintile in 1999. For Sweden (Table 5), of those in the bottom quintile in 1993, over half (56.8 percent) were in the bottom quintile in 1998. Of course absolute amounts matter, since the real value of
assets of those in the bottom quintile in Sweden are well above the assets of those in the bottom quintile in the U.S.

Here, they summarize a point I belabored above: It is therefore difficult to compare mobility in the two countries. Given the larger wealth dispersion, it is possible for the U.S. to have larger absolute wealth changes but still have less rank mobility.

Here is a lovely snippet provided by my Creative Excerpter. The authors are making a lot of adjustments to their data, imputing income for various Government programs, and so on. To compare the two countries, they also attempt to create matched samples, which can be problematic. However, I like this, so I will re-print it:

Given this reservation the main conclusion from the matching exercise is that dollar changes and probably also dollar mobility is higher in the U.S. than in Sweden, while quantile mobility is smaller. The smaller relative mobility is however due to the larger absolute quantile differences, which implies that a U.S. household on average has to change its wealth more in dollars to pass from one quantile to another than must a Swedish household. After standardizing for differences in the initial distribution of wealth, quantile mobility appears to become about the same, although quantile
differences are still larger in the matched U.S. sample.

Well, then, we have some economists who seem to lean against the Krueger-Krugman wind. Any other points?

3. Immigration. Groan. The US takes in a lot of immigrants, generally at the low end of the economic distribution. What you did not know is that Sweden, too, is an immigrant's paradise. No, really. They take in many Finns and Norwegians, and we applaud them for it. I have emigrated from New Jersey to Connecticut, and I assure you, these cultural transitions are difficult.

However, immigrant labor rates started decreasing in the mid-70s, and the gap between the indigenous population and immigrants continued to increase considerably in the past decade, partly due to the recession that began in 1990. During the first half of 1998, the unemployment rate for non-Nordic citizens was 28.3% and a relatively mild 5.7% for the "Nordic" population (the Nordic countries are Sweden, Denmark, Finland, and Norway).

Land of opportunity. Enough, already. Jim Glass explains why it does not matter over in Prof. DeLong's comments. I explain why it only matters to Lefties. LOTS of assigned reading. The entire point of which is this: we had one economist, Krueger, approvingly cite a particular bit of research favorable to a specific political agenda. A second economist, Krugman, then cited the first approvingly. Meanwhile, we, the credulous public, are left to wonder whether either of these distinguished professors is seriously advocating this work as superior to other, conflicting studies in the same field. We are always assured that Krugman separates his politics from his professional economics. How was that separation maintained here?

Having enjoyed exposing the Swedish BikiniTeam, let's get back to our original target, Prof. Krugman himself:

Meanwhile, one key doorway to upward mobility — a good education system, available to all — has been closing. More and more, ambitious parents feel that a public school education is a dead end. It's telling that Jack Grubman, the former Salomon Smith Barney analyst, apparently sold his soul not for personal wealth but for two places in the right nursery school. Alas, most American souls aren't worth enough to get the kids into the 92nd Street Y.

In either of the Krueger or the Krugman articles, this is the sole mention of the importance of education. And it is a cheap shot at the absurd situation in Manhattan. In his very own town of Princeton, which I have not seen described as Calcutta, Prof. Krugman can undoubtedly find excellent nursery schools for far less than a soul-selling price. Which is good, since you shouldn't sell the same thing twice, that's naughty.

Now, I don't like to demonize individual teachers, most of whom are doing a difficult job under demanding circumstances. But collectively, through the NEA, they seem to be a bit of an obstacle to experimentation with our educational system. Perhaps that is why Prof. Krugman sails his ship well away from that particular Democratic rock. As a tidbit, I recall reading that roughly 8% of the delegates to the Democratic Convention are teachers - the summer holiday helps, no doubt.

OK, big finish:

But today's heirs feel no need to demonstrate concern for those less fortunate.

So, our respected economist approvingly cites a fellow who cited some research that might need a bit of qualification and support. He spends half of one paragraph noting that education is the way out of the underclass, but proposes nothing. The rest of the column rants at permutations of rich, powerful, and evil Republicans, as though there are no rich Democrats, no Democrats who have "inherited" political power and ambition, and no Republicans who work for the public betterment.

UPDATE 2: I give up. Kristoff of the Times notes with approval an expensive, exclusive private education system as pointing the way to a brighter tomorrow - in China! Well, investing in human capital is always a great idea, especially when other forms are subject to expropriation. Do any of these guys have any thoughts about education in this country?

UPDATE 3: Which paper did Krueger have in mind? Well, he mentions intergenerational mobility throughout his column, but not in the specific sentence referring to Björklund and Jäntti. Bother. Bjorklund and Jantti do have a paper on intergenerational mobility as well, although all I can find is the abstract. In this paper, which is very probably the one Krueger had in mind, the measure of mobility is the correlation of the income of the son with that of the father. Krueger further suggests that this measure of mobility is also a measure of opportunity, which is the statement that is then trumpeted by Krugman. However, glancing at the abstracts for this paper or this one suggest that equating "mobility" with "opportunity" is far from a settled question in economics.

Comments

I have completed research on 160 years of upward mobility by 143,939 Indians from India from 1845 to 2005 with the help of Education via the Missionaries of the Presbyterian Church of Canada since 1864. Contact me if you are interested in a presentation on my IBM laptop. Telephone 1-868-667-7027 ot 1-868-758-5382

Thank you so much for putting the information out there; I just hope more people will listen. Unfortunately, as a teacher, I have run into so much brainwashing that I have not been able to break through--too many forget others, sucked in by the chimerical dream that they will be the one to make it to the top. Capitalism calls forth the worst in us: greed, lust, egoism, competition at the expense of the reality that we depend on each other, that no one "makes it" alone, nor that material goods can fill the holes in our hearts and spirit.